Developers eager to convert downtown office buildings to residences

Steve Kilar, The Baltimore Sun

Nearly 1,000 market-rate apartments would be added to downtown Baltimore in the next few years if three projects announced in recent days are completed.

"It seems like it all came to fruition this week, but we've been working for a year, year and a half, to get to this point," said Kirby Fowler, president of the Downtown Partnership, which launched a campaign in spring 2011 to encourage the conversion of underused downtown office buildings into residences.

The newest plans include the renovation of one of Baltimore's most distinctive buildings, the conversion of a former department store warehouse and the overhaul of several buildings off a heavily trafficked city center corner. They are the most recent additions to a steady stream of plans that developers, hoping to cash in on rising demand for urban living, have put forward for downtown apartments.

"When you have nearly 100 percent occupancy, there should be floods of development," Fowler said Friday.

Apartment buildings downtown, on average, have occupancy rates above 95 percent, he said. It's one of his favorite statistics. The other is that population downtown grew 130 percent between the 2000 and 2010 censuses, the largest gain in the city.

In 2000, just over 1,700 people lived in the census tract bounded by North Paca Street on the west, President Street on the east, Pratt Street on the south and Franklin Street on the north. By 2010, about 4,000 people lived in that area, which the Downtown Partnership branded "The 401," after the number the U.S. Census Bureau gave it as an identifier.

It's a remarkably diverse group of people, too. About half of those living there in 2010 were in their 20s, but the rest of the population was spread throughout older age groups. Half identified themselves as white, about 1,000 said they were black and the rest said they were Asian or biracial. The median household income in the tract is $49,600.

Fowler and others who have studied the residential downtown market don't see the demand dying, either. In August, the Downtown Partnership released a study that concluded the city center should be able to support about 5,800 new residential units in the next five years. Almost 60 percent of those units should be rental apartments, it said.

"By the end of this decade … we will have unprecedented volumes of demand for apartments," said Greg Leisch, founder and CEO of Delta Associates, a real estate research and advisory firm based in Northern Virginia.

The continued high demand is the result of several factors, he said. There has been a shift in mindset in recent years away from homeownership toward renting, Leisch said. As the economy improves, people who are living together to save money will begin "un-coupling" and occupying their own spaces, he said. Plus, he said, as job creation improves, more people will move out on their own.

And downtown seems to be the right place for new residences, he said. People of all ages are leaning toward urban living and more people are choosing to live without cars, making dense development more popular, he said.

"I don't think there's a mismatch between where our product is being developed and where the demand is likely to be," Leisch said.

That said, Leisch cautioned there could be a glut of apartments in the short term if a lot of buildings open at the same time. But in the long term, the demand is there to fill them, he said.

In order to satisfy the demand, and to deal with declining demand for office space, the city has pushed building owners to consider changing the use of their structures.

"We've looked at it from every different angle, and it's clear that commercial to residential is the way to go," said City Councilman Bill Cole, who represents downtown.

In April 2011, the Downtown Partnership sent letters to the owners of more than 20 downtown commercial buildings that the group had identified in a recent study as being underused.

At the top of the problematic buildings list was 10 Light St., the red-brick office tower crowned with green and gold. The last remaining office tenant of the city's second-tallest building, the law firm Miles & Stockbridge, had decided it would move in 2013 into the Transamerica Tower, leaving the building nearly empty.

The Downtown Partnership encouraged the building's owner, the Nellis Corp., and controlling tenant, Bank of America, to consider a new life for the structure, Fowler said. Both parties understood, and the building was sold to a Virginia real estate firm, Metropolitan Partnership Ltd.

Metropolitan paid $6 million for the 520,000-square-foot, 34-story tower. The partnership announced Nov. 30 that the firm plans to convert the office floors into 445 apartments. The first floor, where there is a Bank of America branch, will continue to be retail space.

Metropolitan's principal, Cary Euwer, did not respond to voice mail and email inquiries Friday. Fowler said Metropolitan is still planning the conversion and has not arrived at an initial estimate of the cost. The financing plan for the conversion is dependent on a new tax credit that Mayor Stephanie Rawlings-Blake is expected to introduce to the City Council in January, Fowler said.

The mayor's office has declined to provide details about the incentive plan, saying the legislation still is being drafted. In October, Rawlings-Blake told the annual meeting of the Downtown Partnership that the credit would be given to "newly constructed and conversion residential projects in downtown."

The legislation would control the rate at which the taxable value of a property increases over a 15-year period, Fowler said, and is expected to apply to developments that create 50 or more apartment units.

David Hillman, head of Southern Management Corp., has been a proponent of a tax incentive for apartment conversions. A blanket credit for all apartments will eliminate the subjective nature and "political intrigue" that is now required to get an abatement, he said.

Hillman's company has been at the forefront of "adaptive reuse" in downtown Baltimore. Among other projects, Southern Management converted the Standard Oil building into The Standard and the Hecht Co. store into The Atrium at Market Center about a decade ago.

Hillman said these apartments are successful in terms of occupancy, but he cannot charge enough rent for them to make money. The company loses about $2 million a year on 39 West Lexington, the former Baltimore Gas and Electric Co. headquarters that was converted into luxury apartments, because the building is underwater, meaning it's assessed for more than its worth, he said.

Although 15-year tax credits would help developers deal with high tax assessments during a project's early years, Hillman said credits shouldn't be relied on when financing is being planned.

"If a project is going to need that incentive to make it happen, it just shouldn't happen," he said.

The two other adaptive reuse projects announced recently will use historic tax credits, intended to provide an incentive to rehabilitate older buildings, but won't rely on Rawlings-Blake's newly proposed apartment construction credit, the developers said.

PMC Property Group is negotiating with the Baltimore Development Corp. to purchase six vacant, city-owned buildings near the corner of Calvert and Lombard streets. A purchase price has not yet been established, said Steven Bloom, the local operating partner for Philadelphia-based PMC.

PMC focuses on adaptive reuse, Bloom said. The firm has converted several buildings in Baltimore, including the Abell Building at 1. S. Eutaw St., that are all at least 98 percent occupied, he said.

"We would not be doing this if we didn't think people would move in," Bloom said. "It's fun to live in century-old buildings."

In addition to the six buildings it's negotiating to buy, PMC is in the process of refurbishing 521 St. Paul St. and 301 N. Charles St.

Outside of The 401, in Mount Vernon, Owings Mills-based The Time Group is converting a former Hochschild Kohn department store warehouse into about 340 apartments. It was most recently occupied by an insurance company, which moved out in 2011.

"We're going to be cutting a 5,000-square-foot hole into the middle of the building" to create a courtyard and "double-loaded corridors," with apartments on both sides of a hallway, said Dominic Wiker, the firm's development director.

The renovation project, he said, will cost about $30 million. Construction is expected to begin early next year and residents should be able to move in by spring 2014, he said.

With all of the new downtown residents expected because of these new apartments, Fowler said, the next step is ensuring that the area's nonresidential offerings are up to snuff.

That means keeping the Circulator bus program running, finding a large general goods retailer to move in and overhauling Lexington Market, among other projects, he said: "We want to keep on creating greater amenities for the residents."